The Rise, the Fall, and... the Emerging Recovery of Project Finance in Transport - John Strong & Antonio Estache, World Bank, 2000
Many transport projects undertaken during the boom period of the 1990s came to a crashing halt in 1997, and conditions in emerging markets worsened in 1998 and 1999. Many projects failed, victim of everything from overoptimistic forecasts to excessive debt to an inability to refinance bridge loans. As available financing dried up, many projects went bankrupt, had to be renegotiated, or were taken over by the government. What have we learned from all this?
Recent developments in emerging financial markets have dramatically changed the appetite for (and terms of) transport infrastructure projects. As a result of defaults in Asia and Russia and devaluations in Asia, Brazil, and Russia, political and currency and exchange risk premia have increased dramatically. Given large needs for sovereign debt financing, infrastructure project finance will be seeking guarantees at the same time as governments are issuing primary securities. Large portfolio outflows in emerging market funds mean that the sources of both equity and debt capital that became available in the mid-1990s are drying up for all but the most creditworthy projects.
Moreover, real economic effects from financial events have consequences in the transport sector, since transport is a derived demand. Any decline in real economic activity is felt quickly in traffic levels and revenues.
What does all this mean for project finance in transport? Risks have increased. Debt finance costs more. The available tenor of debt instruments has shortened and more equity is required for projects. The sources and availability of equity finance have changed. Project finance efforts have shifted from new projects to the privatization, rehabilitation, and expansion of existing facilities. And a "superclass" of sponsors, bankers, and investors has emerged.
